Challenges, opportunities from structural transformation in Georgia

With the right policies in place, structural transformation can boost productivity growth.

As a regular visitor to Kazbegi, a small mountain town in Georgia, it is impossible not to notice the rapid growth of tourism that took place there in the last few years.

The Sameba church, a quiet and contemplative place only eight years ago, still has the breathtaking scenery of the Caucasus as a backdrop, but is nowadays beaming with tourists. People who used to migrate to the cities or eked out a living from farming are converting their houses into homestays, opening restaurants, and offering guide and taxi services to tourists.

Clearly, tourism has thrown a lifeline to this mountainous region. And not just to Kazbegi, but also to other parts of Georgia. Worth over $2 billion, tourism services are now by far the country’s largest industry. As such, the shift toward tourism in Georgia is a striking example of successful structural transformation.

Structural transformation normally implies shifting economic activity from low- to high-productivity sectors, so economy-wide productivity rises and GDP is augmented. The process, however, is not always growth-enhancing; it can even run in reverse, with economic activity shifting from high- to low-productivity sectors.

The countries of the former Soviet Union are no strangers to structural transformation. In the 1990s, structural transformation meant deindustrialization, with economic activity shifting from manufacturing to services and subsistence agriculture.

Post-Soviet structural transformation was triggered by the sudden exposure to world market prices and the breakdown and fragmentation of industrial linkages across the whole USSR. The consequence was a rapid fall in productivity and a collapse of GDP and, ultimately, incomes.

In more recent years, both economic growth and general productivity have picked up in Central Asia and the South Caucasus. But whether this has been driven by structural transformation, or by productivity increases within particular industries, remains unclear.

Productivity growth easier when starting from low levels

Recent ADB research on structural transformation—part of a forthcoming ADB report on employment for inclusive growth in Central and West Asia—sheds light on this question.

The findings indicate that the rapid and almost unprecedented productivity growth experienced over the last ten years by Central Asia and the South Caucasus was driven mostly by higher productivity within industries.

For example, productivity in Georgia’s transportation and communications sector more than doubled since 1995 thanks to improvements in infrastructure, equipment modernization, and adopting best practices. But in the last few years, productivity growth in this sector has leveled off, indicating that initial catch-up effects have largely been exhausted.

This demonstrates that productivity growth is often easier to achieve when starting from low levels, and much harder to accomplish when levels are already high.

Post-Soviet structural transformation contributed little or nothing towards economy-wide productivity growth, according to the study’s findings. In fact, for some countries the contribution of structural transformation was actually negative, as economic activity shifted from high- to low-productivity sectors.

For instance, in Georgia the movement of workers into low-productivity subsistence agriculture and informal services was mainly due to lack of employment opportunities in manufacturing or the formal service sector.

This is clearly not desirable. But there are positives as well. Clearly, we would like to see a stronger contribution from structural transformation to productivity growth. But on the plus side, the study’s findings offer pointers for countries on what they need to do to promote positive structural transformation.

With the right policies in place, structural transformation has the potential to contribute more strongly to productivity growth in the years to come.

Build up productive capabilities to support many sectors

Generally, industrial policies aimed at promoting specific sectors have a mixed record. The most promising policies are those that build up productive capabilities that support a wide range of sectors like infrastructure, market access through regional cooperation, or skills development, among many others.

Building these capabilities generates a twin payoff, as it promotes productivity growth within industries, and raises opportunities for diversification into new and high-productivity industries.

For example, improvements to airport infrastructure benefit tourism as well as other sectors, such as manufacturing, wholesale and retail trade, or export-oriented agriculture.

These improvements raise productivity within sectors. But they also promote structural transformation in those sectors that make the best use of these improvements.

In its triple role as knowledge bank, strategic partner, and catalytic investor, ADB has supported policies that promote structural transformation. One good example is the Sustainable Urban Services Investment Program to improve municipal water and sanitation services across Georgia.

In Mestia, a mountain resort and UNESCO World Heritage site, the upgraded sewerage system not only benefits residents but also supports tourism, thereby facilitating positive structural transformation.

Georgia’s tourism sector is likely to continue to boom, mainly due to its rich history and culture, stunning scenery, tasty food, and the warmth of its people. These are the reasons why this author will never tire of visiting Georgia. And these are the reasons why you should visit, too.